Save Yourself: Creating a Freelance Financial Buffer
Your freelance income can be unpredictable. Savings give you a financial buffer so you’re not relying on this month’s income to pay last month’s bills. Increasing your savings helps you reduce financial stress and stops you from underpricing your services because you’re desperate for work right now.
We’re all familiar with the ups and downs of a freelancer’s bank balance. Some weeks we’re bringing in more work than we can handle, while other weeks our pipeline can reduce to a trickle. If we don’t have work, we don’t get paid. This makes our freelance savings incredibly important—we can build our financial resilience to reduce our stress, create an emergency fund, stay creative, and avoid cheap clients.
Why do freelance savings matter?
Myself and my wife are both freelancers. The most important early changes for us were being able to get through the freelance feast and famine cycle. Some months we’d be earning $4,000 and other months we’d be bringing in $8,000. Saving money during the good months made the bad ones much more bearable! Now I’m more established as a freelance writer, I’m saving for longer-term goals like eventual retirement.
Savings help you to weather the feast to famine (and back again) cycle that’s a common factor of a freelance career.
You can get out of the mindset and concern of living invoice to invoice, and make future plans.
Stress kills creativity. Savings reduce your money worries and anxiety so you can create awesome content.
Savings create an emergency fund, so you can deal with sudden and unexpected expenses.
You can start saving for long-term financial goals like further education, helping out your family, or putting money into retirement funds.
Freelance clients can sometimes take a while to pay an invoice. You can take 30-day payment cycles in your stride.
You won’t be so desperate for work that you need to lower your freelance rates just to attract cheap clients so you can pay bills.
Who should be putting aside money for freelance savings?
If you’re relying on your freelance income to pay the bills, then you need some freelance savings. If you already have some reliable household income—from another job or family member—then saving isn’t as urgent. But even then it’s a good idea to have an emergency fund in an unpredictable work environment.
When should I start building up my freelance savings?
You can only save money after you’ve met your basic needs and paid your freelance taxes. Before you start saving, make sure you can say yes to the following two areas:
You have enough income to meet your essential living expenses—housing, transport, utilities, food, personal care, loans, and other fundamentals.
You’ve put aside enough money to pay taxes on your freelance earnings.
After you’ve taken care of these factors, you can start socking away your money.
Our essential costs work out to about $4,500 a month, with the biggest expenses being healthcare, groceries, property taxes, utilities, and other housing costs.
How to work out your essential living expenses
Your essential living expenses are all the costs you need to pay to meet your basic needs. A place to live, food to eat, staying physically and mentally healthy, getting around, and meeting your other commitments—whether that’s to family, friends, or your loan provider!
Here’s a simple method to work out your essential expenses:
You’ll want to closely track what you’re spending on a monthly basis.
Keep a close eye on your bank account and note down everything that you’re paying out.
Look back three to six months, so you can get an average.
Remember to focus only on “essential” spending.
You can exclude any money you spend on non-essential costs like luxury items or experiences—eating out, takeaways, vacations, hobbies, etc.
Once you’ve done that, you should have a reasonable idea of what you spend most months.
Our overall tax works out to roughly $3,500 a month. This makes the total of our essential costs and our taxes $8,000 between us. That’s the combined amount we need to earn before having enough to put aside for savings.
How to work out roughly how much freelance tax you’ll owe
You’ll also need to pay taxes on a quarterly basis and sometimes at the end of the year. Working out exactly how much tax you'll owe as a freelancer can be complicated. But, in the US, a reasonable rule of thumb is to assume you’ll pay roughly 30% of your freelance profits in taxes.
Remember, that’s a tax on your profits, not on how much you invoice. You get to deduct your business expenses from your revenue, and pay tax on what’s left.
How much should I save each month?
In the early stages of building our savings, we put aside around 70% of our extra income. We did that until we’d saved six months worth of expenses—around $25,000. It took us around a year to build up that amount.After that, we took any extra money after tax and expenses then split it into thirds, with a third going into retirement accounts, a third set aside for house projects, and the final third going into the fun stuff.
Once you’ve taken care of taxes and essentials, you’ll (hopefully) have enough left over to start putting some away. Now, you have an important decision to make: How much of what’s left over do you put into savings?
Anything you don’t save, you can spend on yourself—that’s how you’ll pay for your vacations, hobbies, experiences, and other fun stuff. At the same time, anything you spend means you’ll be putting away less money and it will take longer to build up your freelance savings.
This will be different for everyone, and you need to find the balance that works for your lifestyle and future needs. Some freelancers may choose to forgo any extra spending and put every penny into savings. Others may save 30% of their excess money and spend the other 70%. Some might go 50/50.
The important point here is that once you have enough savings, you can change that ratio. You might live with a bare minimum of extra spending for six months while building your freelance bank balance, but after that, you’ll have enough, so you can go in the other direction.
Find out what works for you.
How many months’ worth of freelance savings should I have?
If you can, try and save between three and six months worth of your essential expenses. If you’re spending $2,500 a month, you’ll want to put aside between $7,500 and $15,000. A horizon of between three to six months should see you through most downturns in your freelance earnings.
Where should I keep my freelance savings?
You’ll want easy access to your savings, That way, if you lose out on work, have an emergency, or otherwise need to tap into the money, you can do so quickly. You could keep your freelance savings in your current or checking account or move some of them into a savings account. Do check that a savings account lets you withdraw money quickly if you need it.
Once you have enough savings for a few months of essential expenses, you can save for the longer term. You might start funding a retirement account or an investment account. If you do, make sure it’s not money you’ll need for the foreseeable future—inevstsments can go down over the short term, but over longer periods of ten years or more, they’re very likely to go up in value.
What else do I need to know about freelance savings?
Keep track of how much you have in your savings. If you’ve needed to dip into them, build them up again as soon as you have some extra income.
Review your essential costs a couple of times a year. If they’ve gone up, top up your savings accordingly.
Remember that you’ll need to pay estimated taxes four times a year, so that will impact on how much you have in the bank.
I am not a qualified professional and I do not provide tax, legal, accounting, or similar advice. These guides are provided for informational purposes only. Always consult with a qualified professional on your unique circumstances. You can find more information in my disclaimer.